Panic and Redemption

Grant Vetoes the "Inflation Bill". U.S. President Ulysses S. Grant on a platform is congratulated boisterously by an audience for vetoing the "inflation bill".

The Panic of 1873 was a world-wide depression that started when the stock market in Vienna crashed in June 1873. Unsettled markets soon spread to Berlin, and throughout Europe. Three months later, the Panic spread to the United States, when three major banks stopped making payments: the New York Warehouse & Security Company on September 8, Kenyon, Cox, & Co. on September 13, and the largest bank, Jay Cooke & Company, on September 18. On September 20, the New York Stock Exchange shut down for ten days. All of these events created a depression that lasted five years in the United States, ruined thousands of businesses, depressed daily wages by 25% from 1873 to 1876, and brought the unemployment rate up to 14%. Some 89 out of 364 American railroads went bankrupt.

The causes of the panic in the United States included over-expansion in the railroad industry after the Civil War, losses in the Chicago and Boston fires of 1871 and 1872, respectively, and insatiable speculation by Wall Street financiers. All of this growth was done on borrowed money by many banks in the United States, having over-speculated in the railroad industry. Grant, who knew little about finance, relied on bankers for advice on how to curb the panic. Secretary of Treasury William A. Richardson responded by liquidating a series of outstanding bonds. The banks, in turn, issued short-term clearing house certificates to be used as cash. People became desperate for paper currency. Although the issuance of clearing house certificates curbed the Panic on Wall Street, it did nothing to stop the ensuing five-year depression. Grant did nothing to prevent the panic and responded slowly after the banks crashed in September. The limited action of Secretary Richardson did little to increase confidence in the general economy.

After the Panic of 1873, Congress debated an inflationary policy to stimulate the economy and passed the Legal Tender Act, known as the "Inflation Bill", on April 14, 1874 to increase the nation's tight money supply. Many farmers and working men favored the bill, but Eastern bankers favored a veto because of their reliance on bonds and foreign investors. On April 22, 1874, Grant unexpectedly vetoed the bill on the grounds that it would destroy the credit of the nation.